TREASURIES-Yields fall to six-month lows, ECB rate cuts expected

Wed May 14, 2014 1:36pm EDT

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(Adds quotes, details on rally, updates Fed purchases)
    * Benchmark 10-year note yields lowest since Oct. 31
    * Government debt rallies on ECB rate cut expectations
    * Fed buys $463 mln bonds due 2025-2030
    * Short-covering helps rally, yields dip below recent range

    By Karen Brettell
    NEW YORK, May 14 (Reuters) - U.S. Treasuries yields fell to
six-month lows on Wednesday, breaking out of a recent range, as
expectations the European Central Bank will cut interest rates
sparked a global fixed-income rally.
    The ECB is preparing a package of policy options for its
June meeting, including cuts in all its interest rates, and
targeted measures aimed at boosting lending to small- and
mid-sized firms (SMEs). 
    A dovish ECB has helped hold down yields on German and U.S.
government debt. The bonds' yield moves are often correlated
even though the U.S. is seen as poised for stronger growth than
Europe, which many expect will eventually send Treasuries yields
higher.
    "It reinforces the notion that from a global perspective
monetary policy is forward committed to lower for longer," said
Ian Lyngen, a senior government bond strategist at CRT Capital
in Stamford, Connecticut.
    Short covering by investors who had bet that U.S. yields
were set to rise, or at least hold in their recent range, added
to Wednesday's rally.
    "We've broken out of the range that we've been in for quite
some time," said Rick Klingman, a Treasuries trader at Societe
Generale in New York. "Globally there's a fixed income rally
going on ... people that thought the range would hold are being
forced out of those positions."
    Benchmark 10-year Treasuries yields fell as low
as 2.525 percent, the lowest since Oct. 31, breaking below
resistance at around 2.56 percent. 
    The notes' yields have oscillated between 2.57 percent and
2.82 percent as investors analyzed data for signs of how soon
the Federal Reserve might begin raising rates, which many expect
to be next year.
    Thirty-year bonds gained 1-8/32 in price to
yield 3.382 percent, down from 3.454 percent late on Tuesday.
    U.S. Treasuries gained even after data showed that U.S.
producer prices posted their largest increase in 1-1/2 years in
April as the cost of food and trade services surged.
    The Labor Department said on Wednesday its seasonally
adjusted producer price index for final demand rose 0.6 percent,
the biggest gain since September 2012. Producer prices increased
0.5 percent in March. 
    Manufacturing surveys and weekly jobless claims will be
perused on Thursday for a picture on the strength of the U.S.
economy, with housing data due on Friday. 
    The Consumer Price Index for April on Thursday will also be
watched for signs that price pressures are increasing.
    Low inflation is seen as complicating the Fed's ability to
raise interest rates unless there are signs that inflation will
rise back to the Fed's 2 percent target.
    The Fed bought $463 million in notes due from 2025 to 2030
on Wednesday as part of its ongoing purchase program.

 (Editing by Chizu Nomiyama and Bernadette Baum)
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